Cronos Group Inc.

Good morning. My name is Tanya, and I will be your conference operator today. I would like to welcome everyone to Kronos Group's 2023 First Quarter Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Shane Laidlaw, Investor Relations. Please go ahead.

Thank you, Tanya, and thank you for joining us today to review Kronos' 2023 first quarter financial and business performance. Today, I am joined by our Chairman, President, and CEO, Mike Gorenstein, and our CFO, James Holm. Kronos issued a news release announcing our financial results this morning, which is filed on our EDGAR and CDAR profiles. This information, as well as the prepared remarks, will also be posted on our website under Investor Relations. Before I turn the call over to Mike, let me remind you that we may make forward-looking statements and refer to non-GAAP financial measures during this call. These forward-looking statements are based on management's current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Factors that could cause actual results to differ materially from expectations are detailed in our earnings materials and our SEC filings that are available on our website, by which any forward-looking statements made during this call are qualified in their entirety. Information about non-GAAP financial measures, including reconciliations to U.S. GAAP, can also be found in the earnings materials that are available on our website. Lastly, we'll be making statements regarding market share information throughout this conference call, and unless otherwise stated, all market share data is provided by HIFIRE. We will now make prepared remarks, and then we'll move into a question and answer session. With that, I'll pass it over to Kronos' Chairman, President, and CEO, Mike Gornstein.

Thank you, Shane, and good morning, everyone. Building off our strategic realignment in 2022, our 2023 strategy is focused on launching innovative, borderless products, improving the gross margin of our overall business, and driving costs out of the P&L as we move toward being cash flow positive in 2024. During our last earnings call, we announced an additional $10 to $20 million in projected operating expense savings in 2023. I'm happy to report that we are tracking towards achieving the high end of this range. This follows our overachievement of savings in 2022 of approximately $29 million versus a target of $20 to $25 million. James will go into more detail on the financial results during his remarks, but I want to comment on the improved trajectory of our gross margin. 2022 was a transformative year for Kronos, which put us on better footing for the future. But given the quarter-to-quarter volatility of our gross margin performance, driven by the timing of certain activities associated with our intended changes at the Peace Naturals campus. We prefer to look at the year in totality. As a reminder, our gross margin for full year 2022 was 13%, but we ended the year in Q4 with a negative 1% gross margin. Turn to Q1, we posted a 12% gross margin on a consolidated basis. Now that we have solidified our decision to stay at the Peace Naturals campus, and to reorganize our business to optimize our supply chain, we intend to build on this momentum to have a smoother gross margin that will improve from Q1 performance as the year progresses. We are also keenly focused on margin-accretive innovations to further diversify our product mix into higher-margin derivative products, such as our number one ranking edibles. In Canada, during the first quarter, we continued to execute our plan to create a robust portfolio of borderless products, highlighted by several new launches across critical categories, such as pre-rolls and vapes. Our spinach brand is the only brand that holds a top 10 market share position in all categories it participates in, which are flour, pre-rolls, vapes, and edibles. Our award-winning spinach gummies became the number one gummy in Canada in Q1. Spinach completed the quarter with a 15.3% market share in the edibles category, growing retail sales by 49% year-over-year versus category growth of 25%. When focusing on just gummies, Spinach had a 21.9% market share. We are thrilled that our gummies have become an integral part of so many adult consumers' lives and would like to thank them for showing brand loyalty and enthusiasm for our products. Winning in the Canadian edibles category against the top U.S. brands gives us additional confidence that this borderless product platform can win in any market. Despite our strong performance, the edibles category has been negatively impacted by chewable extracts, which are products that purport to take advantage of a regulatory loophole to sell at a higher potency per pack than compliant edibles. Health Canada has recently notified producers that these products are incorrectly classified as cannabis extracts and has announced steps to remove these products from market. For reference, four of the top 10 edibles are non-compliant edible extracts, and as a result, we anticipate a more robust back half performance for our edible portfolio. In the vape category, we achieved a 4.4% market share in the first quarter, up 230 basis points year over year, climbing to number seven. We will build on that momentum in 23, with a continued push to include flavor-forward profiles and rare cannabinoids in our vape. driving innovation while leaning on our winning formulations that consumers love across the portfolio. We launched a new Mango Kiwi Haze CBC vape under the Spinach Field brand with 32% THC and 5% CBC. Our CBC gummies performed well in the early innings of their launch in the Canadian market, and we're excited for consumers to try CBC in the vape format. We also introduced our Spinach Field Blackberry Kush THC-CBN vape, which has helped contribute to our outsized 155% growth in retail sales in the category year-over-year in Q1 versus category growth of 22% for the same period. Pre-rolls are one of the fastest-growing categories in the cannabis market. The category increased 38% year-over-year during the first quarter, and infused pre-rolls accounted for approximately 24% of the dollar share in pre-rolls during the same period. Using our success in edibles category as a blueprint for other formats, Kronos continues to elevate and differentiate the consumer experience by bringing a portfolio of infused pre-rolls to market, utilizing our best-in-class potent genetics, our flavor-forward and terpene-rich formulations, and sought-after rare cannabinoids. In Q1, we launched two new rare cannabinoid-focused pre-rolls. Spinach Field Mango Kiwi Haze THC CBC Pre-Roll, and Spinach Field Blackberry Kush THC CBN Pre-Roll. Since revamping the portfolio last year, Spinach Pre-Rolls have gained market share, moving up to the 8th most popular brand in Q1, up from 16th in Q4. With the right-based Pre-Roll portfolio in place and the recent launches of four infused Pre-Roll offerings, three of which utilize rare cannabinoids, We aim to build off this momentum to drive continued market share gains in this critical category for us. We closed the first quarter by maintaining our number three market share in the flour category, equating to a 5.2% share of retail sales. Flour in the Canadian market continues to be heavily weighted to 28 gram bags, encompassing nine of the top 10 SKUs. Despite this, we continue to defend market share across pack sizes, leading with our three and a half gram GMO cookie SKU and our 28 Graham Wedding Cake. GroCo's performance continued to be strong in Q1. GroCo reported a preliminary unauded revenue of approximately $3.2 million to non-Kronos customers. Additionally, the credit facility that Kronos previously provided to GroCo currently had $73.2 million outstanding following the principal repayment of $0.7 million by GroCo in Q1. In addition, GroCo made a $5.5 million interest payment in Q1. The strong financial performance of GroCo yielding equity pickup, interest payments, and loan payback to Kronos is a vital component of our overall financial picture. Turn to Israel, the growth of the medical cannabis industry slowed in Q1, driven by geopolitical factors and government appointment disruptions, which has led to multiple changes in the health ministry, causing a slowdown in patient permit authorization and increased competitive activity. Following recent news from the Israeli health ministry, we have renewed optimism about the prospect of regulatory change impacting how medical patients can access cannabis. A government committee recommended that Israel transition to issuing prescription via public health care services from its current model, which issues personal patient licenses and is a more complex process. The new proposal would enable a more streamlined approach to obtaining a cannabis prescription, potentially increasing patient counts by multiples. As a reminder, the current number of medical patients in Israel is approximately 125,000, or just 1.3% of the population. This compares to certain mature medical markets, such as Florida in the U.S., where 3.7% of the population is approved to purchase medical cannabis. If Israel were to reach 3.7% of their population, that would equate to 346,000 patients, a near tripling of the current market size. This is a realistic scenario we think is possible over the next couple of years, especially given the change would result in a favorable regulatory environment, such as pharmacy distribution in a federally legal jurisdiction. We are confident in the long-term potential of our position in the Israeli market, as it's still one of the world's largest federally legal medical programs today. We have the top performing brand in the market, Peace Naturals, and we continue to invest for growth in this market. In the U.S., we have nearly completed the transition away from the beauty category and are moving forward by returning Lord Jones to its roots as an adult-use brand featuring high-quality cannabinoid products. We are assembling a portfolio of borderless products with strategic infrastructure and global partnerships combined with an industry-leading balance sheet, allowing us to execute effectively in any market. With that, I'd like to pass it on to James to take you through our financials.